Oil Price Roulette: Investors Bet On $100 Oil

Oil prices are rising and
speculators are already staking out bullish positions on futures for the
next few months, but some traders are rolling the dice on a much bigger
price spike in the next two years.

Some contracts that pay off big time if oil
prices hit $100 per barrel by December 2018 just saw a spike in
interest, according to Bloomberg. The $100 December 2018 call option, Bloomberg says, “was the most traded contract on Tuesday across the whole ICE Brent market.” That contract gives the owner the right to buy Dec. 2018 futures at $100 per barrel.

Few oil analysts expect oil prices to rise
that high within the next two years. The oil market is still
oversupplied, and even with the OPEC deal – which will take 1.8 million
barrels per day off the market if fully fulfilled – the world is still
flush with oil sitting in storage. It will take time to work through
those inventories, providing a cushion to a tightening market. However,
the sudden interest in such a remote possibility of a large price spike
suggests that investors are growing more confident that the market is on
the upswing.

“That’s a relatively cheap lottery ticket,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said in an interview with Bloomberg. “It’s
clearly not the consensus in the market that we’re going to see a
return to those prices any time soon, so it’s more likely a hedge
against unforeseen geopolitical events during that time.”

Purchasing these options may not be such a
huge risk – Bloomberg says they could cost a bit more than $1 million
while the payoff would be multiples of that if prices happened to go
that high. It is similar to going to Vegas and playing roulette, putting
some money on a single number or a few numbers, which have long odds
but huge payouts. On the other hand, the spike in interest in the $100
options could also just be a small part of a broader hedging program
from some companies, cropping up now since the contracts are two years
out.

With oil back above $50 per barrel, money
managers have become much more bullish on crude. In fact, collectively,
hedge funds and other investors have sold off short bets and purchased
long positions, building up the most bullish net-long position
in more than two years. OPEC has not yet cut back by a single barrel,
but its Nov. 30 deal in Vienna has succeeded in sparking a bull run for
oil.